@ horgen I have never seen any article on GS or anywhere else stating that. In fact, if you were to visit Wikipedia it has several citations which state that MS is likely to be losing money on every console sold.
Before I start, this is my first "long" editorial-style blog in over a year. I also understand if you cannot read it all, but please try
I am going to make a bold statement here: there should only be two consoles on the market in this day and age. Before any one blasts me, just hear me out.
Throughout the early generations of video games, you saw only two major consoles. In the third (NES and Master System) and fourth (SNES and Mega Drive) generations of consoles, there were only two major console makers – Sega and Nintendo. The third generation saw 73 million consoles sold, whilst the fourth saw 88 million (including the PC Engine), however, the vast majority of sold consoles were from the market leader, be it the NES (60 million to 13 million) or the SNES (49 million to 29 million).
This generation change saw a modest increase in the technological powers of the consoles. There is, as you know, a vast difference in the visual and technical abilities of the SNES over the NES. This means that the games needed more detail, which required more people to work on games and thus requiring the production of games to have higher budgets. These increased budgets mean that sales had to increase also. This was achieved, however, as the technical advances were not revolutionary (the games remained in the second dimension), and the increase in amount of households owning consoles had meant that more people would buy games. Therefore, the increased cost of production of games was met with an increase in game sales.
This pattern was repeated with the introduction of the Playstation in the fifth generation, with the top three consoles racking up a total of 152 million in sales. This generation brought games into the third dimension, meaning that costs skyrocketed. However, this was matched by an increase in the amount of people buying games (more consoles in more households than before), and the increased cost of producing the games was met with increased revenue from game sales.
Again, this pattern was repeated with the sixth generation of consoles, where more visual and technical advances in games meant that the cost of producing games increased, but this was met by an increase in game sales (console sales for the PS2, Xbox, GC and Dreamcast totalled 196 million, and is still growing).
However, this generation is different. Even though the Playstation 3 and Xbox 360 have come along with vastly increased technical levels, the amount of people owning the consoles has not increased enough to make it financially viable for developers to invest money in big-scale games. I mean, if costs double between the sixth and seventh console generation, but sales of consoles do not match this, there will be less of a market for the sale of the game, meaning that a higher proportion of people owning a console need to buy the game for it to be profitable, which is a riskier than having an increased audience.
Now, as you are probably aware, I am making a connection between console sales and the sales of games. I'd like to distinct the two.
Console makers (Sony, Nintendo and Microsoft) only make the consoles because they think they can eventually make a profit out of them, whether it be from profit per console sold, profit from sale of accessories or profit from licenses paid by third party developers to be allowed to release games on their system. To measure the true financial viability of the consoles themselves, the money made from first party developed or published games needs to be removed. If a company relies on their first party games to return a profit to cover losses on the console, then it is better off for that company to just become a third party developer of games, and exit the console business entirely.
Now, I am going to repeat my bold starting statement: there should only be two consoles on the market in this day and age. If you look at how the previous generation panned out, knowing it was the first generation since the NES that there were three viable consoles out on the market, you can see that, from the consoles, Sony was the only company to make a profit and decent return on their investment. As you may well be aware, Microsoft lost billions with the original Xbox, and Nintendo, even though it maintained a profit as a company, the majority of that profit came from their handheld lines and the sale of their first-party games, not from the actual console itself, if you take into account the cost of research and development, manufacturing and marketing.
Now, at that time, Sony and Microsoft could handle the cost of consoles. Their mentality was that the money they received from their whole division in video games will mean that the initial investment in the console was worth it. However, times have changed. In the current economic environment, companies need to make sure that all of their divisions are making the best possible return on their investment, and cut anything that isn't. This is where it gets difficult.
For Microsoft, the Xbox 360 is actually making money. Every console sold makes them profit, yet alone the millions they make from Xbox Live, accessories and from licenses by third parties. The Xbox 360 is in a comfortable position at the moment. Even though Microsoft had announced cuts to the workforce, the majority were "back line" staff, which were not associated with frontline game making. The Xbox 360, for Microsoft, is past the point of draining money and is on the journey to recouping the initial research and development cost of the console. This makes it attractive to Microsoft, as, unless something terrible happens, the Xbox 360 will be around for another few years, giving a steady flow of profit.
Unfortunately for Sony, the opposite is occurring for them with the Playstation 3. The PS3, whilst production costs are lowering, still loses money per console sold. The PS3 also has a lower sales rate of third party titles, which means that they are not receiving as much income from licensing to allow third parties to develop games for their console. Another negative, financially, for the PS3 is the lack of money coming from online services, which, unlike Microsoft, allows for free online gaming.
Now, in the current economy, if you were CEO of Sony Corporation, and you saw a product you were producing constantly failing to meet sales expectations, making a loss per unit it sells and seeing very little ways in which it is making money through either direct or indirect means, then would you not seriously consider pulling the plug on it?
This is what I presume could happen either this year or next if the Playstation 3 continues to miss sales targets, continues to have third party games sell lower than the competition and continues to lose money, unless there is foreseeable opportunities in the future where the money can be remade.
I am not one who is utterly against Sony and the Playstation, but I am just an observer telling it how I see it. With the current state of the economy, companies need to be more financially prudent. Many people say that you can look to the past to see the future, and the past, where two major consoles have stood out in a generation (whilst the others had dismal sales in comparison), shows that the industry can only sustain two large players in the market, and not three large ones. It is obvious that the Wii will not be discontinued, as Nintendo is making mega bucks per console sold, which leaves the possibility open to either the Xbox 360 or the PS3 dying by the end of this year.
EDIT: Just to let you guys know, the following sources (1, 2 and 3) all state that the 360 is making a profit per unit sold. Now, even though these are from 2006, all three sources state that the 360 made ~$75 on every unit sold. Two of the three also said that costs reduced by 40% over the year gap between launch and the dates of these articles. I find it hard to believe that if they were making a profit per unit in 2006 that they wouldn't be making it in 2009.
I agree with hurleytime in one thing: The more the competition, the more incentive video game companies have to be better. I dont think neither the xbox360 nor the ps3 will die out this year, i hope the wont next year. Now you say "if you were CEO of Sony Corporation, and you saw a product..." If they´re in the video game market of today, they have to make a commitment with their customers. It´d be a fraud to the buyers of the xbox or ps3 to spend hundreds in a console, and then have it discontinued a couple of years later. Each console company should commit to at least a 5 year life span for their console, regardless of profit (or loss) margin, or else get away from the industry.
Hurley - I think even GS has some news about MS actually earning money on each sold console. However the extended warranty because of the RRoD have probably costed more than they have earned on it so far. (not thinking about games, only consoles sold)
Wise words. But as a PS3 owner, I would be devastated if my console died out (not an RROD joke) this year.
Console wars have been going on ever since Sega Genesis and Super Nintendo were released. It will never die. "Microsoft vs Sony vs Nintendo" war will be going on for years and years as long as there are fanboys.
I highly doubt that Microsoft is making money on the xbox itself; if you can show me figures to the contrary, I will concede this point. It was my impression, however, that Microsoft is sacrificing profit in its gaming division in order to develop its market, something Sony is not grasping. Ultimately, I would caution against encouraging the "only two consoles" mindset. We can see the dangers of this mindset with the current situation: the red ring of death and the Wii's shovelware. Without a viable competitor, Microsoft would be able to cut product quality without any sort of consequence. Meanwhile, since the Wii is so huge right now, Nintendo has absolutely no motivation to create quality entertainment experiences. Sure, Wii Fit is lovely, but Wii music? That's not an experience, that's a toy, and a poorly made one at that.
I would very much like to know your sources regarding Microsoft making money off every 360 unit sold. I have personally never heard or read about MS so much as mention profit/loss on console sales.
Come on.. there will always be competition everywhere, you can't stop it. Without "BIG" competitions, companies will not get creative in their productions. The problem does not lie in having too many competitions (actually, there aren't too many just the BIG three Sony, Nintendo & Microsoft), the problem is the LACK OF VISION & CREATIVITY OF THE COMPANY. Look at what happened to Sony, the company is now having millions of dollars in losses and talk about being pounded by Nintendo and Microsoft in the console sales and game sales. Nintendo got creative with "Wii" despite having lower production costs. While Microsoft got creative and smart to take gaming to online as early as possible. Sony? what happened to our beloved Sony? Despite having invested millions and millions of dollars in producing the most powerful console system, being the first in Blu-Ray, they've lost market share. Why? simply because of GREED. SONY HAS LOST THEIR CREATIVITY AND PRODUCT CREATIVITY A LONG TIME AGO. They used to be visionary, like what they did with very famous "WALKMAN", but what now? They brought nothing new to the table, and definitely is losing the console wars between the three. Sony could turn this all around by going back to the drawing table and thinking of something "REVOLUTIONARY". Look at Apple, look at Nintendo, despite of the global financial crisis & recession, they still managed to put record-breaking sales! BOTTOMLINE: CREATIVITY IS RECESSION-PROOF!!!
I don't think the competition would be so good if ps3 or x360 died this gen. Wii, while still a gaming console, differs greatly from both ps3 and x360 in many ways. So big that I wonder if it really is big enough competition for its part to make game devs make the best out of their games. To develop(through the generation) like games on x360 and ps3 does. Another thing is the difference from generation to generation in terms of what a console is able to do. Personally I would like to see more progress than what I have seen from Wii so far this gen(compared to last gen, also note: I haven't played so many Wii games yet, it might be better than I give it credit for)
I see what you're saying about two consoles, but ultimately, I feel that three is the best way to go. Sony and MS pretty much just compete with each other. This leaves Nintendo with the freedom to do what they want to do, and develop their own market, and they've done just that with the Wii. It's neither MS or Nintendo's fault that Sony's struggling financially. That's Sony's fault entirely for developing a machine that costs way too much make, thinking no one would have a problem with their price points.